The limits of climate capitalism

One of the questions we raised in the introduction to this book is whether the carbon economy is, frankly, a bit of a scam. That essentially it is more about making money than tackling climate change. If that remains your suspicion having read this far, rest assured you are in good company. Many critics will tell you the whole gamut of carbon trading, offsets and projects under the Clean Development Mechanism (CDM) is based on dodgy accounting, unverifiable assumptions and merely provides new and elaborate ways of escaping obligations to act at home, making money all the while. Let's look at these concerns in a little more detail.

the limits of clean development

So if clean development is making money, is it delivering benefits for the climate (is it clean?) and is it contributing to development? To be registered under the UN's CDM, projects have to show that they achieve both these things.

The problem is that investors have been attracted to those areas where 'low-hanging fruit' (the easiest and cheapest options) are plentiful, where they have other reasons to invest and where institutions are much stronger. They have not been attracted to weaker states where poverty levels are higher and there are fewer opportunities for high returns over short time-frames. Because of this, flows of carbon finance tend to mirror flows of finance in general in the developing world. Brazil, China and India are the leading hosts of CDM projects, between them accounting for nearly 60% of total registered projects and over 70% of all Certified Emissions Reductions (CERs) issued.1

The poorest areas of sub-Saharan Africa, meanwhile, have largely not featured in the CDM deal-brokering - the entire continent of Africa is host to just 1.86% of registered CDM projects.2 Registered projects exist only in South Africa and the Maghreb countries. With a limited supply of large-scale projects, energy or landfill gas (LFG) capture and no hydrofluorocarbon (such as HFC-23) or N2O destruction opportunities, the lucrative and convenient options that have allowed players like China to reap significant rewards are simply not there for many poorer nations. This accounts for the geographically uneven spread of the benefits of clean development projects across the developing world. It is an issue the World Bank is seeking to address through its Climate Investment Funds and the UNDP through its MDG (Millennium Development Goal) Carbon Facility, as a complement to the CDM; but they face a huge challenge.

Early on the market was also distorted by mega-projects which target greenhouse gases (GHGs) with a high level of what's called Global Warming Potential (GWP). Gases with a higher GWP act as more powerful drivers of the greenhouse effect. Hydrofluorocarbons form one such family of gases where one tonne of HFC-23 is equivalent to 11,700 tonnes of CO2. The distortion comes from the fact that the credits countries receive for projects are related to this GWP. So a project to phase out HFC-23 for example produces a significantly larger financial return than a CO2 reduction project for example - in fact it can earn 11,700 times as many CERs as a CO2 reduction project! Consequently 70% of CERs in the first one and half years of the CDM were issued for abating gases other than CO2. But many of the opportunities for HFC-23 destruction worldwide appear to have already been exhausted, and the latest figures suggest projects in the chemical industries sector currently account for just over 3% of projects, while projects in the energy industries sector account for 60% of projects.3

Questions have also been asked about the sustainable development benefits of projects like the large HFC projects. By contrast, the long-term positive effects for local communities are much clearer with renewable energy and energy efficiency projects. In some cases, CDM finance has provided a new lifeline for waste dumps which become profitable as places to burn methane, to the dismay of communities pushing for their closure - such as the Ensenada landfill site in

Argentina, or the 'toxic' dumps in Durban, South Africa.4 Claims that project promoters make about the positive development benefits they bring are often taken by government authorities and certification companies at face value. Some Designated National Authorities (DNAs), the government bodies set up to approve and register CDM projects in their countries, concede they do not have the capacity to assess them for themselves. Similarly, claims of increased employment, sourcing of local materials or health benefits from host communities are often exaggerated or difficult to verify. The fact that the sustainable development benefits of projects do not have a monetary value, in the way 'additional' savings in GHG emissions do, means they are not a priority in most cases.

Rather than investing equity, as was imagined, investors have shown a clear preference for a 'commodity model'. Buyers are preferring to buy emissions reductions produced by a project without providing equity. Most investors do not have the skills to invest in projects, and those companies that do invest in projects in developing countries do not necessarily need credits. The company Trading Emissions Plc,5 for example, is looking to invest $300 million in CERs by concluding emission reduction purchase agreements with project developers. Trading Emissions do not need the CERs, they just want to make a profit - buy early and take risks on a project: invest in a project's potential - and sell on the CERs at a higher price. They also lend money to projects and get paid back in CERs. For example, a $5 million loan can generate 200,000 CERs per year.

Nevertheless, in many countries in the South, the CDM is often regarded as a great opportunity to use climate related funds to invest in projects and technologies that they could not otherwise afford, and that may benefit poorer groups in particular.

Though views are now more sanguine and realistic, early on, many companies and project developers were persuaded by the idea that the CDM would bring about a 'gold rush' of easily accessible funds that would deliver a 'Robin Hood effect' : a redistribution of resources from the rich to the poor. As we saw in Chapter 5 : these expectations were talked up by consultants and brokers who stood

to gain from overseeing projects and selling CERs. In reality, the time lag between setting up a project and receiving the CERs can be several years. The uncertainty about the outcome, the changing nature of rules about approved methodologies and baselines and the fact that money has to be invested up front (and therefore the risks are on the investor and project developer), is enough to deter many potential actors from getting involved in CDM projects in the first place. The transaction costs in getting a project through all stages of the project cycle mean that it is often only larger players in the market - such as PriceWaterhouseCoopers and EcoSecurities - that can flourish, as they are able to absorb these costs up front.

Besides issues of who is in a position to participate in the CDM market and benefit from CDM projects, other more wide-ranging criticisms focus on the issue of the global South being seen as a sink for Northern emissions, most critically referred to as 'carbon colonialism'.6 Even senior government officials within the climate change negotiations, such as the 'father of Kyoto', Ambassador Raúl Estrada-Oyuela, noted at the time of the Kyoto agreement:

My reservation was that the CDM is considered a form of joint implementation but I don't understand how a commitment can be jointly implemented if only one of the parties involved is committed to limit emissions and the other party is free from a qualitative point of view. Such disparity has been at the root of every colonisation since the time of the Greeks.7

In an interview with one of the authors, he made clear his view that in his home country of Argentina, not one CDM project is genuinely additional or contributes to development.8 Others argue, not just that such offsetting mechanisms do no good, but that in fact they can do a great deal of harm. There have been cases of negative impacts on the poor when land is given up for carbon sink purposes, for example. In one such instance, a Norwegian company operating in Uganda, that leased its lands for a sequestration project, allegedly resulted in 8,000 people in thirteen villages being evicted.9 The project in Bukaleba Forestry Reserve was meant to offset GHG emissions of a coal-fired power plant

to be built in Norway. International criticism at the time prevented the project from claiming carbon credits to 'offset' the power plant emissions, but the project continued and the trees were planted. After lengthy negotiations, the Norwegian owners agreed to allocate less than 5% of the land they received from the government at a 'bargain price' to the local people who had previously been evicted. According to one NGO, 'The eucalyptus trees chosen for the project appear to have been a poor choice for the local site. Local people state that they are paid very low wages and that most of their labour is not sourced locally.'10 The danger then is that carbon finance performs poorly as a means of getting resources to poor people, reinforcing rather than reversing inequalities.

can the cdm deliver?

The CDM has certainly been tremendously successful in two ways. It has generated great interest by investors, project developers and traders in the new commodity which it has created, the CER. It has also created great enthusiasm amongst the UNFCCC Secretariat and many national governments because it expanded way faster than its designers anticipated, which is taken as a sign of its value. Proposals in the run-up to the Copenhagen summit in 2009 were about expanding the CDM further to include more sectors (forests, agriculture and land use) and the possibility of moving towards a sectoral approach which reduces transaction costs by funding large-scale shifts in countries' transport or energy bases. The idea of the CDM has, as people in the policy world say, traction.

But does it do the job it was supposed to - reduce emissions by lowering the cost of doing so? And even if it does so, does it do so in a way which doesn't create other major problems? Many identify a series of flaws and problems with the CDM, which raise the basic question we want to ask - what type of climate capitalism do we want to emerge?

At the heart of these problems is the question of methodology. The CDM (and other similar 'project-based mechanisms') is fundamentally different from an allowance-based system like emissions trading (see below). Rather than say to participants, 'you each have this much carbon you can emit, and you can trade these allowances amongst

yourselves', in the CDM, one participant has such a limit on its emissions while another doesn't. There is no real way of saying, therefore, that overall, carbon emissions have gone down. Rather, the claim is that in the country in the South where CDM projects have been developed, the CDM has helped slow the rate of emissions growth in that country. But while of course this may not be particularly useful from a strict climate point of view (which needs overall global emissions to decline), it raises the more immediate question, 'how do we know?'

Many criticisms thus focus on the problems raised by the need in CDM projects to develop a counter-factual - what would have happened to emissions if the project had not gone ahead? These counter-factuals (baseline emissions), which underpin CDM methodologies, have given rise to a whole series of problems as they provide incentives for both buyer and seller to exaggerate the scale of emissions saved by not undertaking a particular activity. Many projects were started before the CDM existed, yet have subsequently tried to claim credits for being 'additional',11 while the availability of CERs provides perverse incentives for HFC producers in China to project expanded HFC production, just so they can be paid not to. The other fear is that the availability of funds through the CDM creates a disincentive for governments to regulate emissions reductions when they can get money for maintaining higher emissions reductions potential.

A related problem is that many of the agencies involved have at least mixed motives in relation to CDM projects. For some Southern countries these projects have become a useful source of foreign investment, and thus the governments have an interest in seeing the projects go through. Designated National Authorities are supposed to play a role in 'quality assurance'- approving projects that look set to reduce emissions and promote sustainable development and requesting more information where they have doubts. However, most DNAs have to trust project developers' accounts of whether local communities object to projects and what measures have been taken to address those concerns, as they don't have the resources or capacity to follow up on applications.

Most companies merely complete that part of the form relating to consultations by suggesting that no feedback was received. This is not so surprising when consultations are often brief, undertaken in

11 Hydro accounted for the majority of projects that failed, with 82 projects failing to progress past the initial validation stage. See http://internationalrivers.org/en/ blog/katy-yan/cdm-verifiers-flunking-additionality-school, accessed 21 July 2009.

capital cities far away from where a project will be based and conducted on an invitation-only basis. Unless the company identifies you as a legitimate stakeholder, you often don't get a say. One Project Design Document (PDD) for a project in Argentina even acknowledges that when asked about the environmental benefits of the proposed landfill gas recovery project most participants felt they did not have enough information to answer the question adequately. This is also not so surprising when it is recalled that those presenting at the meeting are from the government and business seeking to sell credits for the projects. Some governments are more stringent than others in the thoroughness of the screening they undertake and the amount of time it takes to get a project approved, with India, for example, having the highest rate of rejections by the CDM Executive Board.

The methodological problems are particularly acute with certain types of projects. One area with currently low levels of investment is forestry. This partly reflects the controversy around LULUCF (Land Use, Land-Use Change and Forestry) projects. Critics feared that forestry projects would flood the market with unsound credits (given the difficultly of quantifying C02 saved by absorption), creating incentives for countries to cultivate fast-growing trees on large-scale industrial plantations instead of focusing on sustainable and community-based forestry. Economic rewards handed out by a handful of people on the CDM Executive Board could fundamentally transform the livelihoods of millions of the world's forest dwellers and not necessarily in positive ways.12 For this reason restrictions were imposed on the way credits achieved through forestry projects could be used, though this may be set to change given proposals for projects which reduce emissions from deforestation and forest degradation (REDD).13

limits of emissions trading

Emissions trading also of course has to overcome a number of technical and political barriers in order to operate effectively. As we saw in

12 F. Seymour, 'Forests, climate change and human rights'. Note prepared for the meeting of the International Council on Human Rights Policy, Geneva, 12-13 October 2007.

13 The Marrakesh accords restrict LULUCF projects to afforestation and reforestation projects and the total amount of LULUCF CERs that can be obtained is capped. Climate NGOs also succeeded in insisting that credits from LULUCF CDM projects could not be imported into the EU ETS.

Chapter 6, there are now a wide range of emissions trading schemes in operation around the world, which allocate permits on a different basis and establish a variety of rules to ensure their smooth running. Despite avoiding difficult counter-factual judgments about additional-ity and without the pressure to demonstrate sustainable development benefits, there are nevertheless problems with the emissions trading scheme in the Kyoto Protocol.

One is the problem of 'hot air': the surplus emissions entitlements available to countries that underwent large-scale de-industrialisation after the baseline year for their agreed targets. The allocations countries agreed to were in relation to 1990 emissions. Since emissions in the former Soviet bloc countries plummeted precisely after 1990 along with those countries' economic collapse, it was obvious that there would be a lot of spare Assigned Amount Units (AAUs) in the system. The emissions of almost all of those countries remain well below 1990 levels despite an economic recovery since the late 1990s. So it would be easy for countries such as Canada and Japan, who will not meet their Kyoto targets, to buy spare AAUs from Russia or the Ukraine fairly cheaply. Overall emissions will not have gone down, but Kyoto will have been complied with. Of course the hot-air problem does not mean an emissions trading system is inevitably flawed, just that the bargain struck at Kyoto over allocation of emissions rights was tainted by realpolitik, as all such bargains are.

The second problem may be more fundamental, especially from the point of view of an emergent climate capitalism. A market needs actors who behave in market-like ways - seeking profitable opportunities, comparing prices over time, choosing between a range of alternatives, and so on. In the Kyoto emissions trading scheme (Kyoto ETS), it is governments who do the trading. By and large, governments do not act as profit maximisers. So, for example, many states have said that they would not buy hot air, even though that would almost certainly be the cheapest option for complying with Kyoto. There are also arguably not enough buyers and sellers in the system to make a 'real' market. The number of sellers are few - Russia, Ukraine, perhaps the UK (although most of its over-compliance will simply compensate for the under-achievement of other EU states, given the special 'burden-sharing' arrangements for the EU in the Kyoto Protocol) and a few smaller East European states. The buyers are also few - Canada will be the biggest, but probably also Japan, perhaps Norway or New Zealand. Hardly the basis for a vibrant market. Even then, they can wait until near the end of the commitment period before deciding whether to trade or not, so no active market in AAUs is likely to develop. There have only been a tiny number to date since the transaction log went live in late 2007. The Kyoto ETS is not really the basis for a global carbon market (certainly compared to the CDM). In effect, it will be something like an end-of-tax-year reckoning, where your accountant works out that despite the various allowances and tax credits, you still owe the government a few dollars.

limits of voluntary carbon markets

Voluntary carbon markets present a different set of challenges again. Far less regulated through institutional oversight than compliance markets, the quality of carbon credits traded, and the projects from which they derive, have come under sustained attack. Critics focus on the way they let Northern businesses and consumers off the hook in terms of reducing their own emissions, as well as the social consequences of ill-conceived projects.

In relation to the first criticism, Carbon Trade Watch coined the neat term 'the new indulgences' to encapsulate what they see as their main flaw.14 In the Middle Ages, the Catholic church introduced a market for indulgences to enable the sinful to get to heaven. The logic was a market one - given monks had a surplus of virtue, the church could sell this surplus virtue to sinners who needed to repent to get to heaven. Similarly, the over-consumer in the rich world is enabled by the offset markets to salve their climate conscience while changing little in their everyday life. They refer to this as 'purchasable legitimacy'. For critics, then, offsets amount to greenwash where, for example, 'British Airways, which opposes aviation taxes and would never advocate that people simply chose not to fly unnecessarily can, through Climate Care, present its climate-conscious passengers with the option of flying free from concern over the impact of its emissions'.15 Indeed, ludicrous claims such as that the expansion of Heathrow airport will not increase emissions of CO2 can be sustained by this means, because the purchase of offsets means that emissions growth can be compensated by savings elsewhere in the world. Contrary to the claims of advocates of offsets, therefore, critics argue it does matter where the emissions occur because savings made in countries outside of the

climate regime, where most offset projects are hosted, do not count towards meeting Kyoto targets.

In relation to the second criticism about the negative social impacts of offset markets, a few examples feature heavily in the debate. An often cited one is the reforestation project on Mount Elgon in Uganda financed by the Forests-Absorbing Carbon Emissions (FACE) Foundation based in the Netherlands, effectively operating as a carbon offset investment fund for Dutch power companies. It started as a reforestation project in 1994. It gained accreditation from the Forestry Stewardship Council (FSC) for its operations. Later on, another Dutch company, GreenSeat, started selling carbon credits from the project. The project has been plagued with accusations of human rights abuses - using the Ugandan Wildlife Authority to evict families, often violently, who had been farming the land for decades.16 A number of other projects show similar problems, with severe difficulties demonstrating the additionality of the project, its permanence (particularly difficult with forestry projects) or having negative social impacts upon local populations that project developers do not take into account. The voluntary carbon markets thus depend on a motivation by Northern corporations and consumers to salve their consciences for their carbon emissions. It doesn't cost them much to do this. In September 2007, a flight from London to Copenhagen with SAS could be offset through the CarbonNeutral Company for 61.34 ($1.90), representing a value of 610.60 ($15) per tonne of carbon. Credits have been reported as available considerably cheaper than this. In contrast, carbon was selling at that point under the EU Emissions Trading Scheme (ETS) for around 620 ($28.50) per tonne. Remember, in strict emissions trading systems, this price is determined by the overall number of emissions permits in the system and the relative costs of reducing your own emissions versus those of buying emissions credits. In the offset market no such trade-off exists.

This under-valuing of carbon in the offset markets is often regarded as reflecting one of two basic problems (or perhaps both of them). It may simply be 'climate fraud': it may reflect the fact that for a variety of reasons the things which that 61.34 is spent on do not in fact reduce emissions (or increase sinks) equivalent to the emissions produced by the flight. It may alternatively be 'carbon colonialism' -displacing the costs of the flight's emissions onto people in the South

by fixing them in a position as tree planters, or simply by underpaying them for the benefits they provide to the European consumer. Or again, it could be both climate fraud and carbon colonialism at the same time.

What emerges is what critics call 'Enron environmentalism': creative accounting where either what appears on the books bears no relation to activities undertaken, or carbon savings expected to be made in the future are counted as savings made in the present. To be credible, voluntary markets need to address technical issues such as the ability of tree-planting schemes to absorb carbon in the atmosphere to the degree claimed by the advocates of offsets. This is of concern because of inadequate data about rates of carbon absorption and the lack of reliability of forestry projects in terms of their potential to release emissions as they decay over time, which undermine the claim of the equivalence of tree planting to emissions reductions. There are questions over the time-frame of offsets, with emissions (say from a flight) occurring immediately, while the offset may occur over a period of up to a century. This raises issues about guaranteeing that a forest will still be standing and set aside for carbon absorption, especially in areas where land rights are contested and conflict frequently occurs. As Jutta Kill of FERN puts it: 'Who can guarantee a tree planted in Uganda or Kenya will still be standing in 100 years? How many of the countries that host these projects have even existed for 100 years?'17

There are questions over the calculation of baselines for projects - of calculating what emissions from a particular project would have been without the project. For critics, a technical solution to this calculation is impossible, and project proponents have inevitable interests in inflating baselines to maximise revenue. Closely related is the calculation of 'additionality' - of proving that the project would not have gone ahead without the finance from carbon markets and thus that the project leads to 'real' reductions in emissions. Without resolving these questions, the ability of the offset markets to contribute to the emergence of a genuine climate capitalism is unclear. In fact offset markets could easily undermine the legitimacy of other elements which have more credibility, derailing the whole process. The story does not stop there though. Advocates of carbon markets have sought to respond to many of these issues - to reassure

17 Quoted in M. Honigsbaum, 'Is carbon offsetting the solution (or part of the problem)?' The Observer, 10 June 2007.

sceptical publics and investors, to guarantee government support and to carve a future role for themselves in responses to climate change. To do this, they have had to address governance issues: managing carbon markets to ensure they deliver. It is to this issue that we turn in the next chapter.

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